The oil and gas sector is a major contributor to Canada's economy, a proven innovator, and a creator of good jobs. It is also Canada's largest source of greenhouse gas emissions, accounting for 28 percent of national emissions in 2021. Despite improvements in emissions intensity in recent years, overall emissions from the sector have grown significantly since 2005. The oil and gas sector has a critical role to play in achieving Canada's climate objectives and keeping our air clean.
As outlined in the Roadmap , the Government of Canada has a suite of policies to support emissions reductions in the oil and gas sector, including carbon pricing, methane regulations, and multiple measures to support investments in decarbonization, such as investment tax credits for key technologies (for example, carbon capture, utilization and storage, and clean hydrogen), and funding from the Strategic Investment Fund's Net Zero Accelerator and the Canada Growth Fund.
These measures will help reduce emissions in the sector, but the urgency of the climate crisis requires certainty. Canada must reverse the trend of its fastest-growing source of emissions. That's why the Government of Canada committed to cap and cut greenhouse gas emissions from the oil and gas sector.
This new measure will set a limit on emissions, not on production. The design will ensure predictable emissions reductions while providing flexibility to respond to unpredictable market forces. By using better technology and improving efficiency, oil and gas producers can maintain, or even grow, production while lowering emissions.
Extensive consultations to date on the oil and gas emissions cap
For the past year and a half, the Government of Canada has been engaging with provinces and territories, Indigenous Peoples, industry, non-governmental organizations, and other interested Canadians to gather views and input. The government also sought advice from Canada's independent Net-Zero Advisory Body.
On July 18, 2022, the Government published a discussion paper outlining two regulatory options: (1) a new national cap-and-trade system, and (2) modifying existing carbon pricing systems. Many Canadians and organizations provided input. The government received over 150 submissions from provinces and territories, Indigenous organizations, industry, environmental non-governmental organizations, and academics, as well as over 25,000 comments from Canadians. The Government has also held information webinars and bilateral meetings with partners and stakeholders.
The proposed regulatory framework
The Government is publishing a Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap. The Government welcomes input on the Framework to inform draft regulations, which are to be published in 2024. The Framework includes details on the topics below.
A national cap-and-trade system for oil and gas emissions
The Government plans to implement a national cap-and-trade system for oil and gas emissions. Cap-and-trade is a proven market-based approach that has been used successfully around the world to reduce emissions. Cap-and-trade systems work by giving emissions allowances to facilities covered by the system. Each facility must have one allowance for each tonne of carbon pollution it emits. Over time, the government gives out fewer allowances. To comply, facilities must reduce their emissions or buy allowances from other facilities that have reduced their emissions. They can also use a limited number of other compliance flexibilities, such as carbon offset credits.
Cap-and-trade has many benefits. It guarantees the emissions outcome, while giving facilities flexibility by allowing them to trade allowances. This reduces the overall cost. Facilities that cut their emissions cheaply and quickly can sell allowances to facilities that may need more time. The value of allowances creates an incentive to invest in cleaner processes and technologies, without prescribing which and when technologies should be implemented.
The cap-and-trade system for oil and gas emissions will be applied through regulations under the Canadian Environmental Protection Act, 1999 (CEPA). Since 1988, CEPA has been used to address a wide range of environmental issues, including air pollution, chemicals, and greenhouse gas emissions.
Who will be included in the cap-and-trade system for oil and gas emissions
The oil and gas sector includes many subsectors. The cap-and-trade system will apply to emissions from oil and gas producers. It will apply to liquified natural gas (LNG) producers and the upstream subsector, which is comprised of conventional oil, offshore, oil sands, and natural gas production and processing. About 85 percent of the oil and gas sector's total emissions came from upstream in 2021, and new LNG projects are projected to be a growing source of emissions. Emissions from refining and downstream distribution would not be subject to the emissions cap. Refineries are subject to the Clean Fuel Regulations.
The emissions cap
The emissions cap will set a limit on emissions and will be phased-in between 2026 and 2030. The 2030 emissions cap level will be in the range of 106 to 112 million tonnes (Mt) of greenhouse gas emissions. That level is 35 percent to 38 percent below 2019 emission levels. The government will distribute emissions allowances equal to this amount of emissions. Allowances will be distributed to facilities free of charge, initially. This is common practice in cap-and-trade systems. It helps reduce costs to support continued production while ensuring that emissions decline.
The Government has worked closely with industry to set a realistic and technically achievable goal for the sector. Building on production projections from the Canada Energy Regulator's most recent report, and input from industry on current plans for projects and technologies to reduce emissions suggests that by 2030, the covered parts of the sector should be able to reduce emissions to 131 to 137 Mt, or about 20 percent to 23 percent below 2019 emission levels, even as it increases production by about 12 percent above 2019 levels.
To bridge the gap between the emissions cap (106 to 112 Mt) and the estimated technically achievable reductions in 2030 (131 to 137 Mt), the cap-and-trade system will include some flexibility. In addition to allowances, facilities will be able to use two types of compliance options to compensate for emissions above the cap up to a legal upper bound:
- Offset credits from Canada's Greenhouse Gas Offset Credit System and from provincial systems, which represent real, additional, and verified projects that reduce emissions.
- Contributions of a specified amount per tonne to a decarbonization fund, which would invest its proceeds in future greenhouse gas reductions.
Taken together, the emissions cap (total emissions allowances), plus the maximum allowable amount of additional compliance options (offset credits and decarbonization fund contributions), establish the legal upper bound, or maximum emissions the sector will be allowed to emit in 2030. The levels of the emissions cap and legal upper bound are expressed as ranges in the Framework, given the Government of Canada's commitment to ongoing engagement on this policy. The final 2030 emissions cap and legal upper bound will be set based on the best available information at the time the regulations are finalized, informed by data and information received from interested parties in response to the Framework, as well as by regulatory design details.
Long description
| Upstream and LNG subsector emissions, 171 Mt |
| Upstream and LNG legal upper bound, 131-137 Mt |
| Compliance Flexibility, 25 Mt |
| Emissions cap (allowance level), 106-112 Mt |
When the cap-and-trade system will apply
In mid-2024, the Government plans to publish the proposed cap-and-trade regulations for oil and gas emissions for public comment. Publication of the final regulations is targeted for 2025, with the first reporting obligations starting as early as 2026. The start date of the first compliance period will be determined as part of the regulatory process and will begin between 2026 and 2030.
Cap on emissions, not production: The proposed emissions cap is set at a level that holds the sector accountable for greenhouse gas emissions associated with production growth since 2019, but also provides flexibility to emit up to a level that is based on production that is aligned with Canada achieving net-zero emissions by 2050 and that takes into account technically achievable emissions reductions. Industry experts were engaged to inform estimates of technically achievable reductions. Compliance flexibilities provide flexibility to industry to respond to changes in the global markets, while still being accountable for emissions.
Key Design Features
Ensure emissions reductions occur within the oil and gas sector: Emissions allowances will be tradeable among regulated facilities, but would be unique to the oil and gas emissions cap-and-trade system. Surplus credits, performance credits, or other permits or allowances from other regulations or carbon pricing systems, including federal and provincial output-based pricing systems or cap-and-trade systems, will not be eligible for use within the oil and gas emissions cap-and-trade system.
Complement other policies: The oil and gas emissions cap-and-trade system will be designed to complement other policies, including carbon pricing and methane regulations. For example, emissions reductions made by an oil and gas facility would count toward their obligations under multiple policies, including carbon pricing, methane regulations, and the cap-and-trade system.
Distribute free allowances in a way that recognizes better performance: Emissions allowances will be distributed to facilities free of charge in the initial period. The approach to distributing the allowances between participants will be designed to recognize better performers that are able to produce the same or similar products with a lower emissions intensity. The goal will be to encourage all facilities to move toward highly efficient, low-carbon production.
Provide flexibility to accommodate different decarbonization pathways: Some key low-carbon technologies, including carbon capture and storage, need time to deploy. To provide flexibility on how quickly reductions happen, the oil and gas emissions cap-and-trade system will have three-year compliance periods and will allow facilities to bank unused emissions allowances for sale to other regulated facilities within the system.
Require annual reporting of regulated facilities' emissions: All covered facilities will be required to annually report their production and their greenhouse gas emissions. To reduce administrative burden, reporting will align with other programs where possible.
